Central Bankers are Driving Us All Into the Dirt

The Great Unwind has started.

One of the major triggers I’ve been warning about is already happening, even before we understand and/or admit that we are in a recession.

Global corporate debt now sits at a record $51 trillion and is poised to hit $75 trillion by 2020 – just four years away. If interest rates rise and the economy slows, it will be very hard for companies to roll these bonds over – and then we get what S&P Global Ratings is calling “Crexit.”

The bond markets dry up for corporate lending, especially higher-yield junk bonds. This would set off a chain of corporate defaults and bankruptcies that would cause central banks to start to lose control of the economy, as they did in 2008 forward.

The simplest depiction of where we’re at comes from the chart below:

At the worst of the recession in 2009, we saw around 180 total corporate bond or loan defaults. As of the first half of 2016 alone, we just hit 100. That means 200+ by year-end… and we’re just at the beginning of the next financial crisis. Note that most of the 2009 defaults were in the U.S., as is the case again due to the energy “frackers.” But Europe has a bigger flurry coming this time.

The next chart shows how that crisis is likely to progress:

We’re now nearing 5% default rates, as opposed to heights of 16% in 2009. Hence, we have a long way to go here – 300%+ or more, and I fully expect the next crisis to be much deeper than 2008/2009. After hitting $154 billion this year, we will see $100’s of billions of additional defaults in the years ahead.

So, how did this occur? It’s another product and cost of ZIRP and QE policies that appear to create something for nothing. Corporations lever up at such low rates and use that money to buy back stock and engineer mergers and acquisitions – all just re-arranging the pie, not growing it.

The entire fracking industry was a hugely bad investment in technologies that were not lower-cost, but higher. Only QE that pumped oil prices back up temporarily, and super-low-cost junk bond financing, made this industry viable. But no longer, with oil at sub $50 for years now… and many more to come, by my estimates.

When the economy slows and/or interest rates rise to reflect default risks, then we get a negative spiral of more and more defaults. As I predicted, the (ex) frackers are leading this first round of defaults and we’ll see much more to come.

Bondholders and stockholders will lose, employees will lose, companies will disappear and we’ll face a deeper recession from not facing the last debt bubble… that’s the cost: you pathetic, douchebag, academic central bankers!

And don’t even ask about pension funds’ and municipalities’ growing unfunded liabilities, with such low returns on their investments since 2008 and QE. To deal with unfunded pensions, some Chicago homeowners are seeing property tax increases of up to 300%… Holy crap Batman!

So, even homeowners lose with higher taxes and lower property values, as a result.

According to John Mauldin, states like Illinois, Connecticut, New Jersey, Kentucky and Massachusetts are just the first states that will face major defaults, as Puerto Rico is now.

Penalized by low-interest returns, investors will soon see corporate, municipal and even many sovereign bonds depreciate on top of that! Along with high-dividend stocks that are highly overvalued and that investors have also piled into during QE and ZIRP.

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43 comments for “Central Bankers are Driving Us All Into the Dirt”

Vespa P200E

Jul 29, 2016 at 10:27 am

Storms may brewing in the red hot debt market where some investors are led to believe the debt is safe investment. They are piling on to “higher” yield with much higher risk junks not realizing that they can lose their shirts if the interest rates creep up not to mention that debt is either paid off or defaulted and more defaults and NPLs on the horizon.

But no worries as the global CB cabals will continue their experiments to NIRP and helicopter money to buy even the corporate bonds (EU) and stocks (Japan).

marty

Jul 29, 2016 at 10:59 am

Vespa, you forgot infrastructure spending, a la the odious Larry Summers. All we have to do is pave every inch of the US and Europe and the economy will recover. Hey, it worked so well for Japan, don’t ya know.

nhz

Jul 29, 2016 at 2:06 pm

… or we could decide to spend way more money on sick-care, some countries like the US are making big strides in that direction. Think of personal genetics, everyone entitled to the most awesome private parts, distinctive skin color or whatever, all available without a downpayment but with a ‘mortgage’ that you can never pay off in life. Jingle mail would not work with such debts. Maybe we could value everyone’s enhancements through the Wall Street casino, to make things even more funny and competitive.

Even better if we introduce new diseases, toxins or deficiencies that make it mandatory to undergo some genetic tweaks in order to survive. I’m sure Big Pharma and Monsanto are already working to make it happen.

jrroberts

Jul 29, 2016 at 3:38 pm

So Central Bankers will own everything in the end. Sounds a little like Egypt just before Israel became slave for almost 400 years.

Very large cracks are beginning to show clearly in the system.
Liquidity is drying up as free capital has been fleeing to safety.
The past six months of strong demand for physical gold and silver prove this out, despite the price capping market manipulations.

Strong inflows into the GLD ETF also show the movement to safety.
Except, is it safe? Over the past three years a little noticed development has occurred at World Gold Trust Services, the sponsor of the SPDR Gold Trust (GLD) the huge gold backed exchange traded fund.

Within less than three years, World Gold Trust Services has gone through FOUR chief executive officers and THREE chief financial officers. Normally, this is a red flag in corporate governance, raising fears among investors and causing financial concern within markets.

“I suspect the GLD executives are bailing out as soon as they find out what a colossal fraud is being run and don’t want their names connected to it”.
-GATA.org

michael

Jul 29, 2016 at 11:30 am

Waiting for this nonsense to end is exhausting. Just collapse already.

Toddy

Jul 29, 2016 at 9:21 pm

Been waiting for ten years now. My face is blue from holding my breath :)

NotSoSure

Jul 29, 2016 at 11:51 pm

LOL, which is why things won’t collapse. You guys should think about David Stockman, the guys at ZeroHedge, etc, etc. Heck Stockman came out yesterday with a diatribe against Amazon.com. Obviously he’s caught on the wrong side and is now losing his pension.

Amazon will probably be a 2000 dollar stock when everything’s said and done. Harry Dent’s prediction of Dow 30000 will be wrong, it will be Dow 100K before it’s all over.

The truth in Greece will also bear out in America. The muppets will gladly chain themselves in debt rather than face “the collapse of civilization”. As long as that’s true, your faces will remain blue.

d'Cynic

Jul 29, 2016 at 11:56 am

Seventeenth century philosopher, Rene Descartes, cunningly argued that there is no proof that god exist, but it is safer to assume, for the afterlife, that he does. On the other hand, if he does not, it does not matter anyways.
May I suggest that all central bankers are Descartists.
If their printing, and throwing money at the market whenever it sneezes results in a stable and prosperous world then surely, god must exist.
And if their crash and burn up the planet, few will survive to hold them accountable.
Otherwise, a very insightful article.

nick kelly

Jul 29, 2016 at 2:27 pm

I think you may be thinking of Pascal, who offers the well known Pascal’s wager- if there is no god then the believer has only wasted some observances, but if there is, the non-believer has wasted eternity.
So you may as well believe. How? Pascal said if you just go through the motions, it’ll grow on you.
Pascal was a mathematician who was told to add up the numbers from one to a hundred as a punishment after school- he did it five minutes, inventing the sum of a series math- basically saying there are 100 numbers and the average is 50 so…

Il

Jul 29, 2016 at 3:13 pm

That’s Gauss.

gagz

Jul 29, 2016 at 10:20 pm

hahhaha indeed the story of adding numbers as a child is Gauss. at least they’re trying though

JerryBear

Jul 30, 2016 at 4:32 am

Precisely, and the young Gauss didn’t do it that way anyway. He noticed that the first and last numbers 1 + 100 = 101 and the 2nd and 2nd to last numbers 99 + 2 = 101 and so forth 3 + 98 = 101 etc…. He realized he had 50 pairs of numbers that all added up to 101 so he knew that the answer had to be 50 X 101 = 5050 which was of course correct. The formula for summing up all the integers from 1 to some number “n” is: (n squared + n)/2 which gives 5050 if you set “n” to 100. This formula was discovered long before Gauss’ time and he was not advanced enough to know it but he deduced the concept that underlies the formula and is used to prove it. It was a remarkable insight for one so young but he is regarded as the greatest mathematician who ever lived with the probable exception of Archimedes……..

JerryBear

Jul 30, 2016 at 4:14 am

My Mother had a very good answer to Descartes Wager. She said, “If I were God, I wouldn’t let somebody into my Heaven just because they pretended to believe in me out of fear I might actually exist after all.” She has a point, Either you believe or you don’t. Either you have faith or you do not have faith. Hypocrisy will not get you into Heaven as Jesus made perfectly clear….

Dan Romig

Jul 29, 2016 at 12:02 pm

Econ 101:

1) If you borrow money, you have to pay it back; plus pay back a percentage aka ‘interest rate’.
2) If you lend money, you take ownership of collateral to secure the money you’ve loaned, and you also collect interest as you’re paid back.

Any questions class?

nhz

Jul 29, 2016 at 12:04 pm

sounds like two completely outdated principles …

BTW, collecting interest on a loan?? not if you are a lender, maybe if you are a debtor ;-(

Chip Javert

Jul 29, 2016 at 5:31 pm

Dan

Yes, I have 1 question:

How can you do #2 (uh, so to speak) when the competitor down the street is willing to do it without collateral?

nhz

Jul 29, 2016 at 12:03 pm

“When the economy slows and/or interest rates rise to reflect default risks, then we get a negative spiral of more and more defaults. …
Bondholders and stockholders will lose, employees will lose, companies will disappear and we’ll face a deeper recession from not facing the last debt bubble…”

nonsense … when the economy slows the central bankers will go even deeper into NIRP. And who holds all that company debt? At least in Europe a fast growing portion is owned by the ECB or banks that are frontrunning the ECB. These players, just like most of the companies who’s debt they are buying (often companies that are counterproductive for much of society …), are TBTF.

So, this will make the current pain for savers and the middle class even worse, but most debtors (like big business and most people with a mortgage) will profit hugely from the extra money printing. It will continue until some unforeseen crack implodes the whole financial system, probably for good.

In my country mortgage rates were 12% around 1990, they are sub-1% now. Homeprices increased by 500-1500% over the same period (mostly in line with decline of rates) while incomes have at best doubled and the debt load is dozens of times higher. What happens when rates go back to the normal 6-8%? It simply cannot be allowed …

There is this part in the passage you quoted: “…to reflect default risks.”

We’ve already seen how that can drive junk bond yields up, and the riskiest ones into the stratosphere, despite ZIRP and NIRP.

Have you checked the yields of Puerto Rico bonds? In March and April, the yield of uninsured GO bonds maturing July 1 hit 300% when repayment was in doubt.

Risk has still not been totally removed from the equation. Investors these days seem to be OK with losing a little money every year over time, but they don’t like to lose a big part of their principal quickly and without being compensated for it. It’s just unpalatable, even today :-)

nhz

Jul 29, 2016 at 1:59 pm

true, but wake me up when default risks gets reflected on a significant scale …

Even most ClubMed countries have debt yields of just a few %, and of course the average mortgage in Europe is priced as if there is zero risk there too. And how can there be risk in assets that are for a big part owned by central banks? IMHO the only risk in that case is a complete system collapse, and most gamblers in the casino are betting this will never happen.

What when?
It just won’t happen.
No collapse from within, nor from anyone with a stake in the financial system. There’s no Man with a Plan in sight.
Doom boom gloom, we’re caught in a system to big to fail.

Chicken

Jul 29, 2016 at 2:37 pm

Central Banks will of course “fail” accidentally on purpose, why should we expect it will be any different this time?

In short, this is privatizing gains and socializing losses. I hear daily about how everyone just loves and adores socialization, it’s just all the rage.

What we really need is true leadership with a clearly defined corrective action plan, until then we simply exist in the financially repressed dark ages of the Wild West.

Why are ZIRP and NIRP still necessary for nearly a decade straight, you might wonder? It’s because of unsustainable public debt, if rates were to rise then tax receipts would no longer cover the interest payment and public default would occur. All our best thinkers got us to where we are today and personally I believe it was intentional, so Good luck with the currently established brand of socialism!

John Galt

Jul 29, 2016 at 11:41 pm

There was never socialist experiment on a grander scale and eventual failure – which is inevitable with every socialist experiment, as history shows, will be really spectacular.

It’s fascinating that socialism as an idea doesn’t die no matter how many times it fails, but rather takes different forms in countries that were supposed to be immune to it.

JerryBear

Jul 31, 2016 at 2:53 am

Socialism has been very successful at times. you are quite wrong about that.

Mushroom

Jul 31, 2016 at 10:07 am

So….how’s capitalism been doing thruout history?

Lee

Jul 29, 2016 at 5:51 pm

I’ll make a long term (whatever that is!!) prediction of how Japan Inc will solve the government debt problem there……….

It is very simple. The Bank of Japan will simply return all the bonds that it has bought to the government of Japan and in effect ‘cancel’ the debt.

Problem solved.

How this will affect the markets and the value of the yen?

I have no idea.

By the way, look for an interest rate cut here in Oz next week or in September.

d'Cynic

Jul 29, 2016 at 6:31 pm

That must be the plan; just burn the bonds on a pyre.
In a normal world, that should cause a massive inflation, and devaluation of the yen, but the whole world is so upside down that noone knows what might happen.

It doesn’t even have to return them. It could just swap them for perpetual bonds with a negative yield of, say, 0.1% to pay for BOJ’s administrative costs. It would maintain some sort of fig leaf though everyone would know exactly what’s behind the fig leaf.

All these things can go on for years without blowing up, but then suddenly something happens and all heck breaks loose with the currency.

Chicken

Jul 29, 2016 at 10:03 pm

I’ve always thought government should drop the selective tax pretenses and go back to the old-world ways of diluting the currency for their funding. Someone has to pay for education, infrastructure and services, this is my idea of a flat tax and maybe it could be called Socialism, I’m not sure.

d'Cynic

Jul 29, 2016 at 10:19 pm

“Oligarchy then degenerates into democracy where freedom is the supreme good but freedom is also slavery. In democracy, the lower class grows bigger and bigger. The poor become the winners. People are free to do what they want and live how they want. People can even break the law if they so choose. This appears to be very similar to anarchy.
Democracy then degenerates into tyranny where no one has discipline and society exists in chaos.”
– Plato about democracy.

Mike R.

Jul 29, 2016 at 7:15 pm

Trump winning the election or even strong signs that he may win could well be the ‘black swan’ that would tank the markets into crisis. First of all, everyone knows the markets are overvalued, in some cases significantly. Secondly, most in the know folks understand that nothing structurally has changed. Finally, and maybe most importantly, Wall Street is just itching for a market event so they profit on the way down and then back up.

And it would come back up; just like 09 when the Fed, Treasury and PPT brought the stock stock market back up over a year or two period and without QE.

So things may well get out of control here before too long.

John Galt

Jul 29, 2016 at 11:48 pm

Markets are overvalued? I think they just adjusted to devalued currencies.

e.g. is gold too high (it went up 500% or so against the dollar and euro over the last 15 years or so) or still too low (e.g. compared to valuations in the stock and RE markets)?

Are incomes and earnings (for companies) still relevant for the economy if almost anything can be ‘rented’ from the bank for almost nothing and central banks make sure that a big chunk of the population and companies as well make loads of money by doing absolutely nothing useful (through debt, RE, stocks etc.)?

If in reality currencies have strongly devalued and we have had silent (not yet recognized) inflation, the next years will bring significant stagflation as Alan Greenspam suggests, driving up the cost of daily life even more (and not just the mandatory transfer payments to the government like taxes, healthcare insurance, tuition etc. etc.). But I doubt the stagflation will be reflected in interest rates, for sure not in interest on savings accounts ;-(

Anthony

Jul 30, 2016 at 7:44 am

You sir, just said very succinctly what many I know and myself also believe to be the reality.

The only possible reason debt and stock markets can rise in tandem to such ludicrous heights is the fact that underlying exchange is becoming ever more worthless.

This of course leaves open the only reasonable logical position to take knowing that to be the case.

Since 2010 understanding the demographic case, the reason for printing and also the very logical reason as to why that it cannot induce inflation but only deflation, and after thinking deeply about the longer term consequences, I realized I needed to get back to the gold standard.
From that year after moving my business offshore to evade bureaucracy and taxes all my invoices are priced in grams of gold, and converted to the right currency for the payee.
With the usual 30 days if late it is simply recalculated.

The logic is inescapable. If fiat worldwide is truly rapidly diminishing in its true intrinsic value, then only manipulation of the gold price can make it appear otherwise.
This means that one true world currency is being manipulated ever cheaper in real terms, and the corollary of that is that only real upward valuations in all major fiats, ie rapidly diminishing debt loads, paid off by real earnings, yes, laughable, as P/E’s rise ever higher as the bubbles exponentially grow engendering more printing and manipulation

If you invoice in gold, It makes no difference to you if it means less or more of that currency, You still get the same quantity of physical gold as your entire gross income is then converted to physical gold.

You only ever need to collateralize that gold with a lender to produce instant cash in any currency to pay ongoing operations . That is a short term operation as far as your business goes, but ultimately your physical holding of gold can never fall and only rise in quantity, and that is the only measure you need to use.

JerryBear

Jul 31, 2016 at 2:59 am

That was just one of many things Plato was completely full of crap about.

Yoshua

Jul 29, 2016 at 7:19 pm

“According to the Bank for International Settlements’ statistical releases, the gross value of bank-held derivatives has been contracting since 2013. Notional amounts of outstanding OTC contracts peaked at end-2013 at $711 trillion, and by June 2015 had declined to $553 trillion. This is an important point, because an unseen bubble at the heart of the financial system is deflating with unknown consequences.”

nhz

Jul 30, 2016 at 4:57 am

or maybe banks like DB and other big players are just netting the outstanding contracts between them? Nobody really knows, I’m pretty sure the derivatives exposure has been growing all the time instead of contracting.

Ron

Jul 30, 2016 at 4:54 pm

Insurance policies and pensions are mostly required to invest in bonds with virtually zero% interest

With baby-boomers starting to retire under-funded pensions will start breaking.

When they start dying en-masse (triggering life insurance payouts) or other natural disasters from climate change, it will really crack the system.

Meme Imfurst

Jul 30, 2016 at 5:26 pm

Well, nature abhors a vacuum (except maybe in tube audio), and when the dust settles there is no way to keep the masses financially secure.

The take away on a daily basis from the 99% will come home to bite. History will repeat itself. So unless the plan includes voiding the planet of one heck of a lot of homo sapient friends and neighbors, the nature of this vacuum is eventual collapse on itself. There is no protection from such an event…not gold, bonds, stocks, hard assets, not even sure about cash. Trying to examine anything as if it stands alone without considering the whole is a wasted effort. We are sitting in the middle of chaos, we just can’t quite see it yet as if it were a volcano.

When you have billionaires, like Soros making bets based on creating chaos and making a profit from it, you have a wild card in the mix. How many others are there like that? I don’t think any of us have any idea how many lunatics, beside the bankers, are actually running around and shaping events. Cock and Pit-bull fights may be illegal but they are had in the best white tie party circles.

This will not end well, be it tomorrow whenever it comes.

Shawn

Jul 31, 2016 at 4:38 pm

So “Winter is Coming” Corporate defaults mean job losses. Which mean people are going to have a tough time paying those 30 year jumbo and adjustable rate mortgages. What is this going to do to assets like housing in big metro areas?